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Selma Corporation uses Part PB7 in one of its products. The company's Accounting Department reports the following costs to produce 7,000 units of the PB7 that are needed every year. Direct materials $7.00 per unit Direct labour $6.00 per unit Variable overhead $5.60 per unit Supervisor's salary $4.70 per unit Depreciation of special equipment $1.50 per unit Allocated general overhead $5.40 per unit An outside supplier has offered to make the part and sell it to the company for $28.30 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier's offer were accepted, only $9,000 of these allocated general overhead costs would be avoided. Required: Should Selma Corporation buy PB7 from the supplier or continue producing the part internally? Shows the effect on the company's total net operating income by comparing both alternatives

FINANCIAL ACCOUNTING

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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Selma Corporation uses Part PB7 in one of its products. The company's Accounting Department reports the following costs to produce 7,000 units of the PB7 that are needed every year. Direct materials $7.00 per unit Direct labour $6.00 per unit Variable overhead $5.60 per unit Supervisor's salary $4.70 per unit Depreciation of special equipment $1.50 per unit Allocated general overhead $5.40 per unit An outside supplier has offered to make the part and sell it to the company for $28.30 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier's offer were accepted, only $9,000 of these allocated general overhead costs would be avoided. Required: Should Selma Corporation buy PB7 from the supplier or continue producing the part internally? Shows the effect on the company's total net operating income by comparing both alternatives.

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